Major mergers and acquisitions entail a high level of risk for any private equity firm. Between 70% and 90% of M&A fail to deliver on their investment plan, while 60% of transactions actually destroy, rather than create, shareholder value.
Even successful M&A face difficulties in realising post-deal value creation. An analysis of over 15,000 companies found performance, growth, and margins typically decrease following a PE acquisition. The analysis points to management misalignment, distraction and structural changes as the common causes.
The Body Shop’s recent struggles demonstrate the importance of aligning management, in particular. While there are contributing factors for the company’s decline, shortly after its most recent buyout, The Body Shop saw the departure of many of its senior managers including CEO, and general counsel.
It is not the only example. Bain & Company recently highlighted a PE-owned company in the packaging industry that failed to achieve its revenue growth due to misalignment between the leadership style of a newly hired sales chief and the company’s culture.
Avoiding these pitfalls requires a comprehensive human capital strategy, and ideally this should be outlined prior to any M&A deal. This strategy should assess culture differences, interrogate and align management styles and motivations, and provide plans for employee engagement and leadership succession.
Housed within a measurable framework, a human capital ROI strategy provides additional pre-deal due diligence. It further de-risks M&A, enabling PE firms to mitigate post-deal performance reduction, cultural disruption, and potential business fails. This is what the strategy should cover.
Leadership
Assessing the various leadership teams’ capabilities and dynamics is critical. This is done through tools like psychometric testing to gain insights into strengths, weaknesses, and interpersonal relationships. Creation of the leadership team profile will identify potential leadership gaps that could hinder the achievement of strategic objectives post-acquisition.
Incorporating leadership programmes can help address these weaknesses and develop post-M&A leadership skills. These development areas include strategic thinking, change management, and emotional intelligence, to equip leaders with the abilities to navigate post-M&A integration and to drive sustainable growth.
A multi-level succession plan is also essential to prepare for unexpected leadership transitions and to ensure the organisation has a pipeline of capable leaders ready to step up when needed. This safeguards against the type of damaging leadership talent drain The Body Shop witnessed.
Culture
Measuring cultural compatibility pre-M&A identifies potential culture clashes that could derail post-deal integration efforts. For instance, the informal, agile culture of a start-up may conflict with the structured, hierarchical approach of a traditional business, leading to corrosive friction. To bridge these cultural divides, it’s essential to establish clear post-deal objectives (the what) and implementation approach (the how) that both parties align on.
McKinsey underscores the importance of aligned objectives, considering them the foundational “glue” that sustains partnerships within the PE ecosystem. By focusing on common goals, PE firms can facilitate a smoother integration process, blending diverse cultures into a cohesive, collaborative environment that drives sustainable growth and value creation.
Employee engagement
Effective communication, employee inclusion in the transition, and open feedback channels ensure ongoing employee engagement and productivity during and after a deal.
Articulating changes transparently and involving staff in the transition process helps alleviate uncertainties and fosters a culture of trust and collaboration. Establishing mechanisms for employees to voice their concerns and suggestions not only aids in identifying and addressing potential issues early on but also empowers employees by valuing their input.
Effective employee engagement mitigates post-deal loss of talent. McKinsey notes that responsibility and recognition, i.e. involving and empowering employees in the M&A, is essential in retaining essential employees post-deal.
This approach maintains morale while also ensuring a smoother integration process by leveraging the collective insights and commitment of the workforce, ultimately contributing to the successful realisation of post-deal goals.
Reward
Evaluating and aligning financial compensation and benefits with the strategic goals is crucial for fostering a performance-oriented culture within the new organisation.
PE firms must ensure the reward systems are competitive and reflect the market rates to prevent the departure of key talent. This not only motivates employees by aligning their rewards with the company’s objectives but also secures the human capital essential for driving the post-deal success and growth.
By calibrating compensation packages to the market standards and the newly set goals, PE firms can enhance commitment and performance across the board, supporting a smooth transition and the realisation of the acquisition’s full potential.
Measure ROI of the human capital strategy
Evaluating the return on investment (ROI) of a human capital strategy is essential to understand its impact on an organisation’s overall success. This involves analysing a broad spectrum of indicators beyond mere financial performance, including turnover rates, productivity levels, and the outcomes of employee satisfaction surveys.
Additionally, tracking incidents of cultural clashes provides insights into the effectiveness of integration efforts post-deal. By taking a holistic approach to measuring the ROI of human capital strategies, organisations can pinpoint areas of strength and opportunities for improvement, ensuring that their human capital initiatives are directly contributing to their strategic objectives and enhancing the organisation’s value proposition.
